賽富時 (CRM) 2016 Q2 法說會逐字稿

Good afternoon.

My name is Jennifer, and I will be your conference operator today.

At this time, I would like to welcome everyone to the CRM second-quarter FY16 earnings conference call.

(Operator Instructions)

Thank you.

I'd like to turn the conference over to Mr. John Cummings, Vice President of Investor Relations.

Sir, you may begin.

Thanks so much Jennifer, and good afternoon everyone.

Thanks for joining us for our fiscal second-quarter 2016 results conference call.

Our second-quarter results press release, SEC filings and a replay of today's call can be found on our IR website at www.salesforce.com/investor.

We'll also post the highlights of today's call on the Twitter at the handle @Salesforce_IR.

With me today is Marc Benioff, Chief Executive Officer; Keith Block, President and Vice Chairman; and Mark Hawkins, Chief Financial Officer.

Marc, Keith and Mark will share a few prepared remarks and we'll open the call for questions.

As a reminder, our commentary today will primarily be in non-GAAP terms.

Reconciliations between our GAAP and non-GAAP results and guidance can be found on our earnings press release.

During our call we may offer additional metrics to provide further insight into our business or results.

This detail may or may not be provided in the future.

We may also reference certain unreleased services or features not yet available, and we cannot guarantee the timing or availability of these services or features.

So recommend customers listening today make purchase decisions based on services or features currently available.

Some of our comments today may also contain forward-looking statements which are subject to risks, uncertainties and assumptions.

Should any of these materialize or should our assumptions prove to be incorrect, actual Company results could differ materially from these forward-looking statements.

A description of our risks, uncertainties and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent report on form 10-Q.

So with that, let me turn the call over to Marc.

Well, hey.

Thanks so much John, and thanks everyone for being on the call today.

I'll tell you, this second quarter, well, this was just the best quarter we have ever had at Salesforce.com.

And just one quarter after crossing the $6 billion annual revenue run rate milestone, we have now surpassed a $6.5 billion revenue run rate.

That's faster than any software, enterprise software company in history.

And we anticipate we're going to reach a $7 billion run rate by the end of this year.

And we are now well on our way, I mean we have a clear trajectory to accomplishing our goal of being the fastest ever to reach $10 billion in revenues, so exciting.

And no one in our industry is producing these kind of results of our size and scale.

Also in this quarter we became a Fortune 500 company.

That's really exciting for Salesforce, one of the 500 largest companies in the world.

A huge milestone.

Congratulations to all of our customers, our partners and employees in this incredible job.

We continue to be in the fastest growing Top 10 enterprise software company.

And many of you projected that we're going to go from being the sixth largest software company in the world to the fourth largest next year.

That's awesome.

That is next year, only Microsoft, Oracle and SAP are bigger than Salesforce.

That is incredible.

And then of course, we're going onto our next goal, which is to become the third largest software company in the world, first by market cap and then by revenue.

Then only Microsoft and Oracle are going to be larger than Salesforce.

It's just amazing.

Well, I want to thank all of our customers and partners for their inspiration, and all of our Salesforce employees for this unwavering focus on customer success because this is what is driving Salesforce forward quarter after quarter.

It just delights us to see our customers so successful with our products.

And now I'd like to share the highlights for the quarter.

Well, revenue for the quarter rose to $1.63 billion.

That is up 28% in constant currency, and that's just beyond our expectations.

Deferred revenue grew to more than $3 billion, up 33% in constant currency.

And the dollar value of booked business on and off the balance sheet is $9.2 billion.

It's a great indicator of the strength of our future revenues, and we are just really excited to see such strength in our deferred revenue.

Even as we delivered this outstanding pace of top-line growth we also improved non-GAAP operating margin by 170 basis points year-over-year and we are committed, very deeply committed, to improving profitability quarter-over-quarter, year-over-year as we also grow this business at record levels.

All of this translated into another outstanding quarter in operating cash.

We delivered more than $300 million in operating cash flow, which was up 24% year-over-year.

That brings us to more than $1 billion in operating cash flow for the first half of the year, $1 billion in the first half of the year.

And that really demonstrates the cash model built into cloud computing.

This is an incredible achievement.

It demonstrates the power of our model.

Given these outstanding second-quarter results, I am thrilled to announce that we are raising our full-year guidance for both our top and bottom lines.

The high end of our revenue guidance puts us on track to finish the year at $6.625 billion and we're increasing our non-GAAP EPS by $0.01 to $0.72 at the high end of our range.

As you can see from our strong results, along with the incredible momentum we're having with our customer success platform and our sales and service and marketing, community analytics apps.

We're on a trajectory to deliver $10 billion in revenue faster than any other enterprise software company in history.

Did I mention that?

It's been a phenomenal first half of the year.

You'll hear more from Keith in a moment about how we've become a catalyst for business transformation and growth.

And how we're delivering new levels of customer success in every industry, in every region everyday.

And this is especially true in Europe where I spent a majority of the quarter, and where we're seeing tremendous growth.

Our tours in Paris and Munich drew nearly 10,000 raving customers.

And I've had the opportunity to talk to dozens of CEOs in the region, whether it was AXA or Barclays or DMW or Deutsche Telecom, Eurostar, Louis Vitton, Schneider, Unilever.

All of these folks have become very significant customers in the last year with Salesforce.

And I'm even heading back to Europe again next week because we are seeing incredible momentum in our European business.

Right now every Company in the world is looking to strengthen how they connect with their customers.

This is a massive customer relationship management opportunity.

Perhaps it is the largest opportunity in the software industry.

Every company is looking to connect with their customer in a whole new way, every company is looking for a whole new type of customer success.

And no company is better positioned to deliver this to our customers than Salesforce.

There has never been a company of our size and scale focused so exclusively on this customer relationship management opportunity.

No other customer relationship management company has 17,000 people.

Every single employee completely focused on the customer.

And that's why there's no other enterprise software company selling billions of dollars of CRM, and still growing at nearly 30% in constant currency.

Look, Microsoft, Oracle, SAP, they're selling millions of dollars of CRM.

That's with an M. We are selling billions of dollars of CRM, that's with a B. And that is the difference between us and the competition.

No other enterprise cloud can match the breadth and depth of our trusted cloud platform and complete customer relationship management solutions, whether it's service -- sales or service, marketing, community analytics, apps within the internet-of-things.

And no one can match the strength of the Salesforce ecosystem, our platforms, which is accelerating our growth with SIs and ISVs creating solutions that address any kind of business process.

In addition, the App Exchange, which is now the number one business app marketplace, continues to set us apart from all others.

I'll tell you, that App Exchange, all our partners, our platform strategy over the 10 years.

This has really separated us from the competition.

We're not an app.

We're a platform.

And we're not an app, we're an ecosystem.

And we're not an app, we're all about customer success, and it's our partners that help us to create that.

We're seeing tremendous growth in the adoption and uses of our core platform.

We delivered 234 billion transactions for our customers in the quarter, up 79% from a year ago.

That's an average of nearly 3.7 billion transactions every single business day.

We're also gaining traction as we better integrate acquisitions and invest in deep organic innovation.

Well, those results are just phenomenal.

You're going to see more innovation than ever at Dreamforce this year.

You're going to see new products and new clouds, and we're going to showcasing incredible new services.

I mean, we're going to be breaking through with a whole new level of customer success.

We're even going to be announcing this incredible new cloud.

Well, in addition our strategic partnerships are paying off.

There's no better example of this than our relationship with Microsoft.

And at Dreamforce you're going to hear about how we're making our joint customers, the customers of Salesforce and Microsoft, well, we're working more closely together than ever before.

And we're working on making those customers even more successful, delivering deep integration with Office and Outlook and Azure.

I'm thrilled that Microsoft CEO Satya Nadella is going to be speaking at Dreamforce this year with his own keynote.

And that Microsoft Chairman John Thompson will be part of my keynote.

Well, I have to tell you, but as all of you already know, Salesforce just isn't about doing well.

We're also about doing good.

Giving back has been an integral part of our Company culture from the beginning with our 1/1/1 philanthropic model.

Salesforce technology now powers more than 26,000 non-profit and higher education institutions, and the Salesforce Foundation has provided more than $96 million in grants.

That's in addition to the almost $250 million of in-kind services that we've provided to these other non-profits over our life.

And this quarter we've surpassed another huge milestone.

Our employees have given more than 1.1 million hours of community service.

Well, that's just extraordinary.

It's created an amazing culture at Salesforce.

It's an amazing place to work.

And I think it is one of the reasons that our attrition has remained so low at a time of increased talent wars in Silicon Valley, and even in San Francisco.

There's no other technology company like Salesforce.

Look, as I mentioned, Dreamforce is on the horizon.

It's just 26 days away.

It's going to be our biggest and most exciting Dreamforce ever.

And we expect more than 150,000 people to register for the event in San Francisco and 10 million to join us online.

They are going to come from 75 countries.

Dreamforce has become so big, we're bringing in a cruise ship because we run out of hotel rooms.

So we're calling up the Dreamboat, and to provide extra accommodations for all of our attendees.

We've even partnered with Airbnb to radically expand the number of people that we can house in San Francisco.

We've partnered with Uber to make sure there's more drivers available than ever before.

We're even going to have four Airstreams in the Dreampark for special events, and we even have a few people staying there for additional accommodations because we're completely out of rooms.

Look, you're going to see the future of Salesforce in my keynote with relationship intelligence, next generation of clouds, the internet-of-things.

You're going to see a whole new standard for our industry.

We have 1500 customer-driven breakout sessions at Dreamforce.

The world's biggest cloud ecosystem coming together in one place, thousands of solutions from more than 400 companies in our cloud expo.

Isn't that amazing?

And I didn't even mention the huge Foo Fighters concert that's going to be happening on Thursday night.

And our special event for our very top customers with John Legend the night before that.

We've also gathered an amazing group of global thought leaders.

In addition to Satya we have an incredible lineup of innovation speakers including the CEO of Uber, Travis Kalanick; Skoll Foundation's Larry Brilliant; John Collison of Stripe; William Marshall of Planet Labs who just launched more of his doves into the atmosphere; Captain's Creek's Josh Tetrick; George Zimmer is launching his new company, zTailors and zTux at Dreamforce.

We even have best-selling authors Tom Davenport, Andrew McAfee, Dov Seidman and many, many, many, many others, all speaking at Dreamforce.

And we're all going to be talking about the future of business, the future of technology, the future of the cloud, social, mobile, the future of data science, internet-of-things.

And the future of social responsibility as well and the importance of business to give back and to manage their stakeholders, not just their shareholders.

A new Dreamforce Women's Leadership Summit features actress and entrepreneur Jessica Alba, YouTube CEO and Salesforce Board Member Susan Wojcicki, and Oscar winner Patricia Arquette.

Incredible focus on the empowerment of women at Dreamforce.

And we have a start-up summit to inspire the next generation of entrepreneurs with keynotes from actor and entrepreneur Adrian Greneir, I'm sure you all loved the movie Entourage.

Box CEO Aaron Levie, Pro Football Hall of Famer, Steve Young.

And we have a mindfulness day because we're all going to need to kick back, relax and clear our minds after that Dreamforce.

And we have one of the world's top meditation teachers, Jack Kornfield, as well as actress Goldie Hawn and fashion icon Donna Karan all talking about the importance of taking care of ourself while we're taking care of the world.

And World Champion San Francisco Giants CEO Larry Baer, the Golden State Warriors President and COO Rick Welts are going to share the secrets for success in professional sports.

Throughout Dreamforce we'll have many ways in which attendees can give back.

Each day at Dreamforce is a focus on an important cause in our world.

One day will be dedicated to our veterans, one day dedicated to our K-12 schools, one day dedicated to women in technology and one day dedicated to the environment and our oceans.

And we're holding a fantastic benefit concert, as I mentioned, with Foo Fighters and other incredible bands that you're going to love to support children's health and our children's hospitals.

Bring all your friends.

You're not going to want to miss it.

If you buy a sponsorship for the concert we're going to make sure you get unbelievable seats and recognition.

And we're going to have the world's largest book drive of all times.

So if you want to come to Dreamforce, you better bring a book for kids because we're going to be collecting books and putting them in libraries all over the country.

Collecting more than a million books to support schools and students.

So don't forget your books.

Don't forget bringing food because we're running a huge food drive.

And I look forward to seeing you all at Dreamforce.

And don't forget, it's going to be the biggest, most exciting Dreamforce of all of time.

Now over to Keith.

Thanks, Marc.

As you said, Q2 was really an outstanding quarter.

We were executing like never before and we are seeing exceptional performance across the board in every geography, in every industry, and certainly in every cloud.

We saw an amazing number of big deals this quarter, really.

For example, the marketing cloud doubled its number of large deals year over year, which was terrific to see.

And more importantly, the value of our large deals across all the clouds has increased significantly.

That is proof positive of the level and depth of the relationships that we're certainly driving with customers.

As Marc said, we are now part of the Fortune 500.

And that is a great indicator of how Salesforce is delivering customer success at scale.

It's pretty clear that Salesforce is taking share from our competitors.

And we are growing at every segment in every industry and at every region as software center of gravity continues its shift from on premise to the cloud.

In the past year we have had countless conversations with CEOs of world-class companies.

Marc mentioned his trip to Europe around innovation and taking their companies into the future.

They're looking to us to help transform their business models to drive growth and to become their trusted advisor.

Every CEO's agenda is about growth.

And they are looking for Salesforce to be that growth engine.

They are looking to us, and it all starts with our customer success platform.

These are conversations that are driving more meaningful and long-term relationships, quite frankly with some of the greatest companies on earth.

And I'm going to give you some examples starting with [Enel].

Enel is Europe's largest power company with 61 million customers.

This deal was significant in terms of expansion of an important relationship where the CEO was personally involved.

We are now Enel's strategic partner for the complete transformation of their customer engagement platform, leveraging sales and service and communities, analytics and platform.

But that doesn't stop there.

In addition, we are building an agility layer around their legacy on-premise SAP system.

And we're helping them extract information from complex order management and inventory and billing systems.

They're having trouble getting meaningful and timely information out of SAP, and Salesforce is bringing all this data together so Enel's teams can get a 360-degree view of their customers.

And with wave analytics, they can drill down into their customer data right from the mobile phone in seconds.

Enel absolutely has a tremendous vision for the future, and we at Salesforce are helping them make it a reality.

We also signed a significant deal this quarter with a huge global systems integrator.

And just as they advise their clients, they themselves are making a major shift to the cloud and decided to replace their aging on-premise software with our sales cloud, with our marketing cloud and with our platform.

I'm also pleased to tell you they are doubling down on a dedicated Salesforce practice and we're very, very excited about that.

So with this win with this very large integrator, virtually every global systems integrator globally is running their business on Salesforce.

In fact, the number of Salesforce certified consultants across the globe grew 44% year-over-year.

It's pretty staggering.

This is a great indication of the type of growth and success that we're seeing in our partner ecosystem which is one of our growth strategies and our partner strategy overall.

We're very, very pleased with this.

The US Department of Agriculture is another exciting win for us in Q2.

In one of the largest agencies they standardized on the Salesforce platform to build and deploy mobile application.

In addition, their Farm Service Agency is also using our service cloud to connect citizens to critical resources.

Our public sector business is just growing off the charts.

And I am really proud of the team for their outstanding performance.

And just a year after being Fed RAM certified, we are building huge momentum with federal, state, and local governments.

In fact, 15 out of 15 federal cabinet agencies now use Salesforce, as well as 45 of 50 state governments.

And we are just getting started in this space.

We also signed an exciting new relationship in the quarter with one of the largest hospitality vendors in the world.

Now, they have an incredible vision to bring all their customer service together onto a single platform to deliver a very personalized experience at scale to millions of their guests.

The service cloud will now be the social mobile front office to their Oracle back office and allow their hotel associates to better engage in service guests, no matter where they are anywhere in the globe.

It was a great win over Oracle, and they chose Salesforce for our ability to deliver customer service on a flexible platform that would allow them to innovate with scale and speed.

Axa has significantly expanded their seven-year relationship with us, and in the quarter they've decided to consolidate 18 systems together onto our service cloud to run their entire global front office with more than 26,000 users.

They are taking sales and customer service to a whole new level by modernizing their agent engagement platform with Salesforce.

Now, we've also signed newer expanded relationships in the quarter with Barclays and BBC, Comcast, Commerce Bank, Cox, Ford, Genomic Health, Glaxo-Smith Kline, Honda, Honeywell, Renault.

Listen, This list just goes on and on.

It's pretty clear that we're driving success in every major industry.

And as all of you know, industries have been one of our critical strategies.

We're incredibly excited about our industry momentum.

It continues to gain mind share with our customers and our partners.

In fact, we'll be launching our first industry products at the end of this month.

Some of the most influential industry-leading companies are serving as our design partners in the development of these industry clouds.

The early feedback has absolutely been incredibly positive, and you're going to see these products in action at Dreamforce.

Speaking of Dreamforce, we've tailored the experience for customers with a special industry showcase in Dreamforce Expo, as well as industry keynotes and special sessions.

It's going to be four incredible days for banks or retailers or manufactures, telecommunications companies, government entities, healthcare providers.

And I really hope that you check it out.

So I want to close by congratulating everyone at Salesforce for their tremendous performance this quarter, and of course just incredible execution.

I also want to thank our customers for their continued commitment and inspiration and our partners for ongoing investment in our customer success.

With our customer success platform, our six world-class clouds, our industry innovation, our partner ecosystem, our international strategy, we are the innovation engine and trusted advisor for companies looking to redefine their customer strategies and take their businesses into the future.

And with that, I'll turn it over to Mark.

Thanks, Keith.

As you've heard, we delivered another great quarter.

From a top-line perspective we delivered revenue of $1.63 billion, up 24% in dollars and 28% in constant currency.

Foreign exchange continued to impact revenue with year-over-year headwinds of approximately $50 million and a sequential tailwind of $4 million.

Our revenue was strong across the board, becoming more diversified across each geography, all of our clouds, and all of our business units.

For example, our geographies continued to deliver great year-over-year growth in constant currency basis as Americas grew 28%, EMEA grew 29% and Asia-Pac grew 25%.

We also delivered incredible year-over-year growth in all of our clouds on a dollar basis, as sales cloud grew 10%, service cloud grew 40%, platform and others grew 36%, and marketing cloud grew 29%.

Dollar attrition for the second quarter excluding marketing cloud was approximately 9%.

And not only did we continue to grow our top line we also improved our bottom line, expanding our non-GAAP operating margin by 170 basis points year-over-year.

And this is our fifth consecutive quarter of year-over-year improvement.

We've been able to deliver this improvement by driving efficiencies across all our operating expense categories.

As we remain committed to improving our non-GAAP operating margins year-over-year going forward, this is consistent with our operating margin framework we've discussed previously.

Our great top-line performance along with continued spending discipline allowed us to deliver non-GAAP EPS of $0.19, up 46% over last year.

Turning to cash flow.

We delivered another strong quarter with operating cash flow of $304 million, up 24% over last year, and we've already delivered more than $1 billion in operating cash flow this year, up 44% for the first half of the year.

Second-quarter free cash glow defined as operating cash flow less CapEx was up 37% over last year to $240 million.

Looking at billed deferred revenue, we delivered growth of 29% year-over-year.

Excluding an FX headwind of $72 million, deferred revenue grew 33% over last year.

On a sequential basis, deferred revenue was impacted by an FX headwind of roughly $12 million.

In the quarter, 74% of the value of all subscriptions and support-related invoices were issued with annual terms, and this is compared with 71% last year.

This increase is primarily due to our annual invoicing policy for new contracts, and to a lesser extent shifting current customers to annual terms upon renewal.

In Q2 this benefited year-over-year deferred revenue by approximately 1 percentage point.

Moving onto guidance.

With our strong performance in the second quarter, we are raising our full-year revenue guidance by $75 million.

We now anticipate to be $6.6 billion to $6.625 billion for 23% growth.

This guidance includes an FX headwind of approximately $175 million, which is a bit less than previously expected.

Given the spending discipline I've discussed and slightly lower impact from FX in the second half, we now expect to deliver approximately 150 basis points of year-over-year non-GAAP operating margin improvement.

This is the high end of our previous guidance.

In that context, we are also raising our full year non-GAAP EPS to $0.70 to $0.72.

Now let's turn to cash flow.

We continue to anticipate full-year operating cash flow growth of 24% to 25%.

For Q3, we anticipate revenues of $1.69 billion to $1.70 billion, non-GAAP EPS of $0.18 to $0.19 and deferred revenue growth in the mid-20% range.

To close, we are very pleased with our second quarter results.

We saw strong growth across all of our products and regions, and are well positioned to move into the second half.

I'd like to thank the entire Salesforce team for delivering another great quarter.

I look forward to seeing all of you at our annual Investor Day at Dreamforce on September 15.

And with that, I'd like to open the call to questions.

Operator?

(Operator Instructions)

Our first question comes from the line of Brent Thill with UBS.

Good afternoon.

A question for Mark Hawkins.

On the service cloud the growth rate really stood out, accelerating to 40% up from what you saw in Q1.

Just curious if you could give everyone just a little more color on what you're seeing in service cloud and what you see in the pipeline going forward?

Sure.

I'll start out on this and we'll just turn it over, Brent to Keith as well here.

But we saw just tremendous amount of traction in the service cloud.

I think part of the issue when we see deal after deal coming forward is the ROI.

It so strong.

People are able to help their customer raise their customer satisfaction, and also have a really strong ROI from that standpoint.

So I saw it coming through in a lot of big deals, and that's probably a good segue for Keith.

Just a couple comments on that.

Obviously, this is proof positive that we aren't just a salesforce automation company and that we have a very diversified, very, very strong portfolio across the customer success platform.

Specifically around service.

As you know, many companies differentiate themselves because of service and the way that they deliver service.

So many companies are looking for innovation around how they engage with their customers.

And over 70% of all sales, quite frankly, come from great service.

So we're seeing this play out in the marketplace as customers talk to us about how they can transform their business.

And our service cloud product is best-in-class.

So that certainly is what we're seeing ongoing onto the marketplace right now.

I'd just like to add with the service cloud, we've talked a lot about the success of many of our customers, including Home Depot, we've even pointed you to our really cool Home Depot community site, community.

HomeDepot.com.

If you want to see the service cloud in action yourself you just have to go to support.

US.playstation.com.

That's Sony's website for supporting the Sony PlayStation, runs entirely on Salesforce's service cloud.

It's had over 16 million page views so far.

And we're doing our service cloud, our console, case management, live agent knowledge, and social service with Sony.

It's completely cool, and it's another great example of the success our customers are having with service cloud.

Your next question comes from Keith Weiss with Morgan Stanley.

I just want to thank you guys for taking the question, and very nice quarter.

A question for Keith, perhaps.

In talking about the vertical solutions that you guys -- or industry solutions that you're locking to rollout, the actual product as you're looking to rollout, you're obviously thinking about two aspects of it.

One, how do you think about that expanding the potential market opportunity for Salesforce.com?

I'm assuming that it's going to let you guys go deeper into existing customers as well as address new customers, but I'd like to get your perspective on that, as well as from a distribution perspective.

Anything you guys need to change around or expand out to be able to well distributable sell those industry solutions?

Yes, listen.

Thank you very much for the question.

So as we continue to fuel our industry strategy, it really starts on a number of ways.

Number one is that we want to make sure that we have the right industry messaging, the right content around our customer success platform specific to a particular industry.

Secondly, industries just deepen the relationship with a customer.

Marc and I both talked about the level of engagement that we're seeing from CEOs.

A lot of that dialogue is around specific industry and vertical content.

So as we continue to think about our product portfolio and we extend our customer success platform, which is an incredible platform, it's not just things that we extend ourselves, our customers extend it.

We have an incredible ecosystem that extends the capability of the platform.

There is a natural play to deepen the relationships, drive more strategic relationships, with more industry-focused product.

Specific to your question around how we organize in the field.

Over the last few years, we have been very carefully and very slowly moving to more and more of a vertical orientation.

For example, we have a huge focus on our public sector.

We are taking a look at expanding how we go after financial services markets and healthcare and life sciences markets.

So we've done this very carefully and very thoughtfully, and it's really paying out in our results.

Your next question comes from Mark Murphy with JPMorgan.

Yes, thank you.

Question for Marc Benioff.

It seems like a fascinating time in the history of the software industry.

You have Sage rearchitecting under the force.com platform.

The big three traditional software companies are trying to deal with the cloud a bit more actively.

And for a couple of them, their product revenues are actually declining for the first time ever outside of a recession, and then their margins are under pressure while yours are increasing.

So I'm wondering as they talk up their own cloud products, to what extent do you think the bigger traditional software companies can retain some of their customers versus to what extent it feels like they're leaking buckets and they might inadvertently drive more customers to reassess and perhaps move in your direction?

Well, I think the way to understand the future is to look at the past, and you can look at IBM with the mainframe business.

I think we all know IBM still sells a lot of mainframes.

That doesn't mean that IBM is innovating, it doesn't mean that IBM is creating value for customers or helping them to transform customers' businesses or align them with modern trends, just means they are selling them old technology and upgrading it.

And that's what you see with companies like Oracle and SAP.

These are old technology bases that are meandering along like mainframes.

And I think that is reflected exactly as you said, in their license revenue growth which has been poor.

And in their movement to the cloud has been stunted because they don't want to shift those customers into new models, exactly why IBM lost the PC business because they were too afraid to let go of the mainframe.

It's the past replaying itself, but instead of IBM you've got Oracle and SAP basically running the same playbook.

But we all know that the world has changed.

It's moved to the cloud.

It's multi-tenant architectures.

It's about metadata-based application development and deployment.

It's about social user interfaces.

It's about mobility.

And it's about data science and it's about the internet-of-things and the integration of everything.

And companies who have built platforms, like Salesforce who have done that, deliver world-class growth like we're doing in this quarter.

And if you haven't done that, well then, you end up with a quarter like Oracle or SAP had.

And I think you've seen in the last four or six or eight quarters they've missed almost all of them, and that's because their technology bases are degrading the way mainframes have.

But they can hang in there with their revenue, and it's meander along like big dinosaurs moving down the desert for awhile, but nothing can stop the movement of new technologies.

And the key to being successful in the technology industry is to kind of transform that innovators' dilemma to kind of constantly rethink and reconceptualize yourself to have a beginner's mind.

And if you can do that, you can create something amazingly new.

And you're going to see at Dreamforce more examples of Salesforce doing that.

I've never been more excited about our technology base and what we're delivering to our customers.

But ultimately I've never been more excited that customers just love using our solutions, love working with us.

And you feel that when you're at Dreamforce, and you're going to feel that in a bigger way than ever before.

(Operator Instructions)

Our next question comes from Richard Davis with Canaccord.

Hi.

Thanks very much.

So in my opinion, you guys have really improved, and frankly continued to improve on force.com.

And so my question is, by running a platform operation, you've seen successes like Veeva emerge, which is kind of win/win, but you also get to see emerging promising companies.

Could you either -- I mean, you may not be able to name the firms, but at least -- by name, but at least by segment what do you see kind of emerging?

Because you guys get a free look at some of the interesting things that are out there that are pretty exciting.

Thanks.

Well, one of the things that we've done is not only become an amazing platform company which has spawned incredible companies like you've seen like Veeva, which has become one of our largest customers, or even Financial Force, which has become one of our largest customers, we've also had the chance to help our customers build and create their own applications using our platform.

And I think that's been actually by far the most exciting thing for us, because it's taking us from just having a static application to something that customers mold and shape like they would with Play-Dough or Lego and they can create everything they want.

And when you get to Dreamforce, you're going to see the next iteration of our lightning platform that we released last year and you're going to see a level of application creation capabilities that's never been before possible in our industry and the ability to execute that on everything from an Apple Watch to a phone to a desktop or a tablet.

And that idea that we do have, that super-dynamic app dev-environment, that's how we built all of our applications means we can help execution that vertical vision, or that line of business vision, or the vision for any specific customer so much more rapidly.

I think it's also one of the reasons we've been able to create this incredible venture fund.

I think you've seen we've been able to deliver amazing returns with our venture fund because we see -- we do see everything and we've been able to have incredible relationships with all these new companies and get them to integrate and work with our platform, and you're going to see that show up at the show as well.

Burke Norton is actually sitting at the able who runs our venture fund and sees a lot of these new companies.

Burke, would you like to add anything about that?

Sure.

Yes, I think that the amazing thing is that just over the last year alone we've really massively increased the level of investment in the investment program.

We don't reveal these numbers, but it's a several order of magnitude larger than how much we've invested previously.

So we're really excited about what the returns we're going to be seeing in the coming years.

And we couldn't be happier about the opportunity we have to see these companies in their very earliest stages.

Great.

Thank you very much.

Your next question comes from Tom Roderick with Stifel.

Good afternoon.

So question here about RelateIQ.

Going on a little over a year since you've made the acquisition.

Been seeing more in the way of marketing advertising, just more socialization of what RelateIQ is and what customers are using it for.

Can you talk a little bit more about what the plans are for that technology?

How you think about maybe potentially integrating it with other clouds outside the sales cloud, and just anything else you have planned for RelateIQ as it pertains to integrating with the broader organization?

Thanks.

I think you'll have to come to Dreamforce because it's going to be one of the most exciting announcements we have at the show.

Your next question comes from Kash Rangan with Merrill Lynch.

Hi, guys.

Thank you very much.

By my calculations it looks like billings grew 30%, almost 30% on a year-over-year basis, pretty spectacular if I take into account the year-over-year changes in deferred revenue, impacted deferred revenue.

So Marc Benioff, question for you.

Oracle executive chairman said some time back that in their next fiscal year that they will add more cloud subscription revenue than Salesforce.com.

Just wondering what you think of that?

And also secondly, look at some of your businesses.

Your platform business, congratulations, almost $1 billion business today.

Service cloud, almost $2 billion.

As you march up and try to be the next $20 billion revenue company or whatever, what are the products that are going to look like the big successes tomorrow?

Is it going to be Wave or is it going to be platform or is it going to be marketing?

Which is going to be the next sales cloud?

Which is going to be the next service cloud?

I'm trying to get your view for the future.

Thank you.

Well, Kash, I think we've mostly seen Oracle actually fail in the cloud market.

I mean, for a long time Larry said that the cloud was ridiculous.

And then he started to take it more seriously.

But I just haven't seen any competitive cloud solutions from Oracle, and I think that's the shame.

And I do view Larry as one of the most capable leaders in our industry.

He's amazing.

Of course, he's one of my mentors.

But in this area of the cloud, Oracle has not delivered.

And I think a great example of that is in the CRM marketplace.

Here you can see Salesforce is selling billions of dollars of CRM in the cloud this year.

Oracle is selling millions of dollars.

And I think if you are selling millions and you have a competitor who is a relatively new entrant selling billions, I'd chalk that up as a failure in the cloud.

Your next question comes from Heather Bellini with Goldman Sachs.

Hi.

Just had a sort of a follow-up to what Kash was asking.

But specifically wanted to focus on Wave and talk a little bit about how you've seen adoption since you launched it at Dreamforce a year ago, and kind of what a typical rollout pattern looks like from customers from the ones who have become big adopters?

Kind of how does their footprint evolve?

And also, what are you hearing from the field, maybe Keith Block this, as to what the next level or next stage of innovation that customers are looking for on the analytics side?

Thank you.

Okay, hi, Heather.

Thanks for the question.

So as you know, we're very excited about announcing Wave at last Dreamforce.

And very quickly we were able to sign up some large very strategic deals.

In fact, if I go through the roster of customers that I just mentioned in the earnings calls, many of them were existing analytics customers or had signed up net new as analytic customers.

And part of the solution that they're looking for to transform their businesses.

So we have gotten tremendous feedback about the capabilities of that particular cloud and how it fits relative to customer engagement and driving customer success and how it does against the competition.

I'll tell you, it will be the fastest launch of any product line that we've ever had here at Salesforce.

So there's a lot of enthusiasm, there's a lot of innovation, there's quite a bit of traction with the product.

We're getting some great feedback from our customers.

We're getting great feedback from our partners.

And I think that it is very differentiated in the way that it drives insights to actions.

And that's not something that you see from the legacy BI product lines that have been entrenched for 20 or 30 years.

So customers think of it as innovative and game-breaking.

And we're starting to see the results.

Your next question is from Alex Zukin with Stephens.

Hi, guys.

Thanks for taking my question.

Maybe Keith, you mentioned the growth of the Salesforce consultants worldwide at 44%.

And I'm wondering how has your messaging changed to the SI community, or what has changed about their practices that they are making these types of investments for that?

So there's several things going on.

First of all, I think everybody knows that one of our growth strategies was to really expand our ecosystem, and that takes a couple flavors.

We talked a little bit on this call a couple questions ago around our platform and our ISE focus, but another very important piece of that obviously is the systems integrators globally and the regional boutiques who have influence in the boardroom, who have industry expertise and deep content and are at the forefront of helping our joint customers transform their businesses.

Really what's happening is that we're moving away from the legacy world on premise into the cloud.

And the integrators and influencers in the world they see it, they want to be part of it.

They see new business opportunities.

They want to drive unprecedented levels of customer success.

And we're the only company that can bring that solution to bear with our customer success platform at scale.

And that's why these integrator and influencers are really latching onto us and partnering with us and locking arms.

And they are making the investments in their Salesforce practices and cannibalizing their legacy SAP and Oracle practices.

And that's exactly what's happening.

They see this huge shift in the marketplace and they want to be able to respond to it with us.

I think they also, just to add onto Keith's point, they clearly see that the world is going to the cloud and they want to be a part of it, no doubt.

Your next question comes from Karl Kiersted.

Thank you.

A question for Mark Hawkins.

Mark, congrats on the margin and cash flow performance during the quarter.

I actually wanted to ask you a question about your guidance on both margins and cash flow.

You've guided to non-GAAP operating margin improvement of plus 150 basis points.

I think in the first half you were plus 180.

So the guide implies a little bit of a slower rate of improvement in the second half, and it's not obvious why that would be.

And then on the cash flow side, to get to your 24%, 25% growth given your great first-half performance, operating cash flow in the second half would actually have to be negative year over year.

And we haven't really seen that since the recession.

So my take is that you're appropriately keeping expectations low and there's some conservatism built into both margin and cash flow guide.

But I wanted to give you an opportunity to flag anything that might be informing your guidance on those two metrics in the second half.

Thank you.

Sure.

No, appreciate the question actually.

Let's just break it down one question at a time.

Let's start with the operating margin.

We're super pleased with the operating margin, as you heard.

We've expanded the operating margin for five quarters in a row year on year.

Moreover, you've heard from Marc and I just absolute unequivocal commitment to the revenue operating margin framework that we talk about in terms of the rate of growth and the rate of operating margin expansion.

That's really clear, and you're seeing period after period after period of demonstrating that with action and results.

And we're committed to the increase, obviously.

And so at the same time, it's our -- obviously our priority as a Company to be a growth company and to take full advantage of investing to go tackle this amazing TAM that's out there that's north of $50 billion today.

It's a double-digit growing TAM, huge opportunity.

So clearly what we're doing is we're growing rapidly, fastest growing top 10 software company in the world, and we're expanding operating margin, just exactly as we said we would do, just exactly consistent with the framework.

So obviously making sure that we're investing in growth as well.

So I think that's the key point there.

We feel great about the guide.

We've raised the guide.

Effectively it was 125 to150 basis points, as you said.

Now we taken it up to 150 approximately, and we feel good and confident about that.

So we'll get a chance to revisit that as we go, but that's where we are at.

Point one.

Point two is on the operating cash flow.

One of the things that is pronounced, not only in operating cash flow but in a number of the metrics of the Company, we've talked for actually quite some time around the compounding effect of more and more of our invoicing showing up in Q4.

And as we know, one of the effects of that shows -- makes our cash flow growth more bimodal.

It shows up more in Q1 and then it shows up more in terms of Q4.

And that's no shock.

And one of things that we want to make sure, we think we have a very solid operating cash flow guide.

By the way, that's exactly consistent with the revenue operating margin framework that we put out, Right down -- the exact framework that we added.

And at the end of the day, when we see -- when we have -- we are closer to Q4, when we have more visibility around Q4, we'll revisit that.

And well have a better sense of is there anything we want to change there, but we think it's an appropriate guide.

So hopefully that helps on both sides.

Your next question is from Brendan Barnicle with Pacific Crest Securities.

Thanks so much.

Keith, I had two quick follow-ups for you.

One on Wave.

When might you take that more down-market?

We've heard about a lot of success at the high end of the market.

And then second on the marketing cloud, obviously great momentum there.

Is there a point at which you need to have an e-commerce engine that you partner with or build?

Particularly hearing that about something that CMOs are looking for in their marketing applications.

Thanks.

Yes.

So thanks for the question.

Just a couple comments.

I mentioned earlier on Wave how excited we were at Dreamforce and demonstrated some proof points very quickly.

And we continue to gain momentum in the marketplace.

I think one of the things that the Wave team has done just an outstanding job of is to get feedback, and that's what great companies do.

They listen to their customers and their customers inspire them.

That's what Salesforce is all about.

So we have gotten some great feedback on analytics.

We are well positioned in the marketplace.

We've got a great ecosystem associated with analytics.

We've got more than 80 partners.

We've done some great things with Merck and Barclays and Genomic Health.

And we'll continue to evolve and augment and enhance the product so that it is far-reaching.

So we're excited about the future of Wave.

We think it's going to be an incredible product.

It's already had a great first year, almost first year I should say.

We're very proud of our marketing cloud performance in the quarter.

That cloud is gaining momentum.

It has really been an incredible part of our customer success platform.

It completes our solution for our customers to transform their businesses as far as how they define their digital strategies and their customer strategies.

And so we will continue to see, again as all innovative companies do but none like Salesforce, we will continue to innovate our product line and enhance our product line.

And there are natural adjacencies that you look to.

And we'll continue to innovate.

That is the DNA and the heart and soul of this Company.

We are all about innovation.

So you'll continue to see great offerings coming out of this place.

Your next question comes from Kirk Materne with Evercore ISI.

Thanks very much and congratulations on the quarter.

Marc and Keith, I was curious about your comments on Europe.

Obviously you're starting to see really nice momentum in that region.

I assume a lot has to do with some of your investments in the data center side.

I was curious about your thoughts on is the market over there getting better?

Are you guys taking share?

And I guess in particular around your cloud offerings, are there any solutions in particular that are resonating with customers over there, whether it's the service side, marketing cloud that's really helping you guys gain the momentum?

Thanks.

I think the most important thing that we did in Europe we did quite a few years ago, which was decide that Europe was extremely important to Salesforce.

And we refined our distribution strategy really being focused on seven core countries which we've really just expanded to nine core countries.

The idea that we were going to be super focused in Europe in the UK, France and Germany was a huge reset for us, because ultimately what we're doing is building the UK cloud, the French cloud, the German cloud.

And we're paying more attention to these customers inside these countries than ever before.

Of course, that doesn't mean we don't do business in other countries or don't have customer in other countries.

But this extraordinary focus in these core countries where the buyers are has paid off in spades for us and it's allowed us to scale distribution, scale service, scale marketing and make sure our products are right for those customers in those core mega-markets.

That has resulted in numbers in Europe and growth in this Company.

We haven't seen numbers like this growing in Europe in other software companies.

That's the power of what's going on.

So I only see more of that.

I'm heading back to Europe next week because I am so excited about the European opportunity and the customers that I met with and spent time in Europe, well, that has escalated.

I'm really not meeting with the CIOs anymore or the Chief Revenue Officers or Chief Service Officers.

When I get over there, we're meeting mostly with the Chief Executive Officers because they're more committed to delivering their customer capabilities than ever before.

Keith, do you want to add to that?

I'd echo what Marc said.

We made a conscience decision as a Company to focus on international growth.

We saw Europe as a huge opportunity.

The European market has been shackled by legacy technology for decades, quite frankly, and they are screaming for innovation.

The CEO dialogue, the agenda of the CEO is growth.

Our message is all about growth and customer success.

So there's an alignment here that is fantastic.

And we're seeing it play out in the marketplace.

We have made significant investments and those bets are playing off internationally in all the areas Mark has mentioned.

So international is a strength area for us, for sure.

EMEA in particular is a great story.

We have a great team.

And all of our senior executives spend plenty of time talking to senior executives in our customer base in Europe.

(Multiple speakers) I'd just like to add if you go to my Facebook feed or my Twitter feed you'll see I posted a video that summarizes our Q2 results.

And I spent the majority of the quarter in Europe.

I lived over there.

It's the third year in a row that I've done that.

And the video covers some of our activities in Europe for the year and the quarter as well.

Just to chip in one last point, Kirk, you'd asked about market share specifically.

I just want to -- since you asked it and addressed it directly, we're globally taking market share.

It's been a persistent trend in CRM.

Gartners report just showed we just took another 200 basis points of market share.

So that's exciting and I just wanted to get that out since you asked about it.

Our final question comes from Phillip Winslow with Credit Suisse.

Obviously you guys have had another great quarter of billings growth but also have balanced that with margin expansion and cash flow.

The question here is to Marc and then to Keith as well.

Obviously (technical difficulties) lots of areas that Salesforce can continue to expand and you definitely have a broad vision here.

And if you look at where some of the leverage is coming from, it's definitely the sales and marketing line.

How are you balancing this broad vision about kind of continued growth aspirations with the margin expansion (technical guidelines) and one quick follow-up to that.

Just initially, and then perhaps Marc Benioff will chip in as well, but I'd say the way we're balancing that, Phil, is that clearly we have a huge opportunity as articulated by Marc Benioff.

It's an amazing market space.

And the way we balance it in terms of our different offerings in our Company in total is we're a growth company number one, and we have the revenue margin framework that we look at to try to make sure we're fully taking advantage of really helping our customers in these markets and helping them be successful.

And at the end of the day we want to also expand our operating margins in a framework consistent with our revenue growth.

So we try to balance that at the highest level.

And then obviously it goes down to each of the different clouds.

A lot of companies have one single product that they're driving.

It's unprecedented to have the number of clouds that we have that are huge, either billion, multi-billion, so on and so forth.

So there's a portfolio that people look at.

But Marc and Keith, do you want to add more?

Yes, I think I'd just follow that up.

This is an incredibly successful Company that is -- it's just an execution machine with great products and great customers and great innovation and great partners.

And as part of being a growth company, we invest in our customers.

We invest in innovation.

We invest in our employees.

And we invest in our partners.

And when you are the leader and viewed as the trusted advisors to the most significant and important companies in the world, that's what you do, that's where you place your bets and that's where you innovate and invest in.

And that's what this Company is all about.

It's innovation in growth and customer success.

We have reached our allotted time for questions.

And I'd like to turn the conference back over to our presenters.

Well, thank you very much.

Thanks everyone for joining us today.

We appreciate it.

We look forward to updating you on our Q3 results in November.

We look forward to seeing you at Dreamforce, and particularly our Investor Day on September 15.

And in the meantime if you have any follow-up questions you can e-mail us at investor@salesforce.com.

Thanks so much.

Thank you for your participation.

This does conclude today's conference call and you may now disconnect.